Thai rate increases no longer automatic

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Thai rate increases no longer automatic 
Bangkok Post: 28 Apr 2011

Rate increases no longer automatic
Central bank sees more global risk

The Bank of Thailand is likely to be more cautious about increasing interest rates in the near future as negative factors in the global economy persist.

The central bank has increased its benchmark rate by 1.25 percentage points since July last year to 2.75%.

The European Central Bank earlier this month lifted its key rate for the first time since 2008 by a quarter point to 1.25%. Meanwhile, China has been using a policy of interest rates, tougher bank reserve requirements and gradual yuan appreciation to slow its overheating economy.

Atchana Waiquamdee, a central bank deputy governor, said that developed economies had been surprised by the extent of oil price-driven inflation during the past few months. Most central banks are likely to increase interest rates as a response, which would reduce consumer spending power.

"The crude price has remained below its peak of 2008, but farm prices have continued to increase to record highs," she said yesterday. "Although many oil producing countries showed readiness to increase supply, the oil price is likely to increase this year. The supply disruption is expected to ease in 2011.

"Central banks around the world have learned a lesson from the first oil shock in the 1970s that they can't keep interest rates low amid high oil prices in the hope of supporting economic activities, as that will spur inflation."

The United States can do little more to stimulate its economy given the massive size of its deficit. The Federal Reserve, meanwhile, faces a dilemma whether to allow interest rates to increase to slow inflation.

"The US will have a limitations with its fiscal policy. The economy might weaken," Dr Atchana said. "We do not expect the tail-end scenario to happen. We expect the global economy to still perform well. Inflation and oil prices might decline. The economy might be able to grow better in 2011."

However, she said the scenario for higher interest rates in the global economy would reduce pressure from huge foreign capital inflows to regional economies in this year, as yields in the region would be less attractive.

"The foreign capital inflows in the region are expected to be more balanced over the next couple of years as the interest rate differential will narrow. But volatility will still be a key issue as major currencies would still be sensitive to news," she said.

"If China allows the yuan to appreciate more, the baht can strengthen. That might help reduce inflation."

Benjarong Suwankiri, an economist with TMB Bank, said the Thai economy was likely to grow 3.6% this year, below the central bank's existing 4-5% forecast, on weak investment amid subdued political confidence.

Robust exports, up 31% year-on-year in dollar value in the first quarter, and domestic demand driven by an increase in the minimum wage and record-high farm prices would underpin economic gains this year, he said.

"Private investment is expected to grow 10% in this year. But the key factor for investment is confidence, rather than interest rates. It will very much depend on public confidence after the elections," Dr Benjarong acknowledged.

"Economic growth will likely be modest this year as there are several negative factors in play."

http://www.bangkokpost.com/business/economics/234147/rate-increases-no-longer-automatic